Leverage and volatility claim another victim
Just two years ago, Leopold was asked on a podcast about his top priorities for the investment firm he was preparing to launch.
“Obviously, not blowing up is task number one and two,” he replied.
Last week, it nearly did.
It is impossible to know precisely how much of the July decline in AI stocks was caused by the problems at Situational Awareness—or how much of the recovery reflects the completion of its forced liquidation.
But the episode, like the scores of other Wall Street fiascos that have preceded it, is worth studying, as it offers investors several important takeaways.
These lessons that extend well beyond one hedge fund—or even the recent turmoil in AI stocks.
It shows how hidden market forces can drive stock prices far from underlying fundamentals, and how forced selling can create volatility that investors mistakenly interpret as new information about a business.
It demonstrates how extreme leverage can transform a painful but survivable correction into an existential crisis, stripping an investor of the ability to wait for a long-term thesis to play out.
It also reveals Wall Street’s recurring tendency to confuse intelligence, confidence and a spectacular early track record with durable investment skill—even in the presence of obvious red flags (like a complete lack of investing experience).
We spoke to one prominent asset allocator this week, who informed us that his investment committee had in fact “scolded” him earlier in the year for failing to invest with Leopold—showing just how easily even the most allegedly sophisticated investors can get carried away by groupthink and exciting personal narratives.
Above all, the Situational Awareness wipeout is a reminder that successful investing is not simply about identifying where the world is going.
Successful investing is about building a portfolio that is capable of surviving unexpected turns along the way.
Leopold’s fund has apparently not been fully liquidated. It still owns private market investments, including an early stake in AI model platform Anthropic, a business which could be on its way to becoming one of the most valuable businesses in the world.
Nonetheless, this was a catastrophic mishap for investors in the Situational Awareness fund, which declined in value by nearly 70% in July. And for the general investing public, it was a source of needless market volatility.
On the other hand, it creates a good learning opportunity.
Below, we distill six important investment lessons from the events of the past few weeks. But first…
Who is Leopold Aschenbrenner?
To understand how the fund came so close to total disaster, it helps to understand the unusual young man who created it.
Leopold does not have the conventional pedigree of a hedge fund manager.
Ken Griffin famously traded bonds and other securities from his Harvard dorm room (after persuading the school to permit a rooftop satellite dish that supplied real-time market data). He later made his mark in the intensely quantitative world of convertible bond arbitrage.
Leopold had a much different backstory. Rather than learning the ropes as an analyst or trader, he got into money management through his early close associations with the budding AI community….
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